Saturday, September 27, 2008

I'm No Economist But I Can Do Arithmetic

During the first Presidential debate last night, Jim Lehrer challenged each candidate about what he would do to take account of the new fiscal reality likely to result from the bailout (or whatever action is taken). Sen. Obama said he would invest in vital infrastructure and look to cut unnecessary programs, singling out private insurance for Medicare; he also suggested he would delay some of his other proposals, presumably including health care; and he said he would seek an expeditious reduction in our spending on Iraq. Sen. McCain said he would consider an across-the-board spending freeze on non-military, non-veterans, non-entitlement programs.

How much would such a freeze (described post-debate by a McCain campaign spinner as a "bold" answer) save? Well, according to the government figures, in 2006, total discretionary spending was $843 billion. Of that, $411 billion was spent on defense, and another $33 billion on veterans. So, the category of spending McCain singled out totaled $399 billion. In 2007, non-military, non-veterans, non-entitlement spending totaled $389 billion. The source cited only has requests for 2008, rather than actual allocations, but that number is $410 billion. So, without a freeze, from 2006 to 2007, this category of federal spending actually declined, but let's give McCain the benefit of the doubt and assume that without a freeze this time, we would see the growth equal to what we see between the actual 2007 number and the President's 2008 request. That would be an increase of $21 billion.

In other words, the "bold" McCain plan to offset the $700 billion bailout would be to reduce federal spending by at most about $21 billion. But of course it's not even that much, because if we use the President's numbers, military and veterans' spending increases from FY 2007 to FY 2008 by $58 billion. So, before we even take into account the annual growth in entitlements spending, McCain's "freeze" would actually leave the government $37 billion further in the hole. To be sure, he could seek less in military spending than Bush has, but over the course of the Afghanistan and Iraq wars, the President and Congress have tended to budget too little money for ongoing operations, requiring periodic supplemental spending bills.

The most optimistic scenario for McCain would seem to be something like modest growth or even no growth in defense spending, coupled with modest growth in entitlements. According to HHS, federal entitlement spending rose from $561 billion in 2006 to $631 billion in 2007 to a projected $671 billion in FY 2008. So let's be extremely generous to McCain and assume that entitlement spending only grows by $40 billion. That still more than wipes out the savings from his across-the-board freeze, even assuming flat military and veterans' spending.

Bottom Line: Obama was correct when, in the debate, he said that McCain's approach would use a cleaver instead of a scalpel, but the much bigger problem with McCain's freeze is that McCain's cleaver is orders of magnitude too small to do the job.

34 comments:

I have to first congratulate you on managing such a short after debate post given all the issues about which McCain was either wrong or lied. Personally, I don't think either candidate handled this particular question well, but I think McCain probably came off sounding better.

Neither of them were willing to prioritize their programs. McCain, owing that to most people "math is hard", almost certainly came off ahead on this. His "freeze all spending" sounds good in much the same way that his "no more pork!" (I wish he meant that literally) sounds. An answer from Obama that started by actually explaining how little money McCain was talking about AND followed by some reasoned prioritization indicating exactly which programs would be cut or delayed would have been strong. Unfortunately, Obama essentially punted and when asked about which important issues would now have to be put on hold, he instead chose to recite a laundry list of programs on which he wanted to spend.

This approach was particularly disappointing given his frank response to McCain on "pork." It was really refreshing to hear an honest response of "Yeah, pork sucks, but really, we are talking about an insignificant amount on cash in the big picture." In reality, Military spending (now, including Iraq), Medicaid and Social Security (and now, the "bailout") so completely dwarf all other expenditures that if you are not talking about tax policy or one of those three (now four - but on an ongoing basis, it is three), you are not making a significant dent. To me, $18B in pork is a transaction cost of passing legislation. If we could "fix it" - fine - but I am certain it is a fiscal irrelevancy and I think "pork" certainly makes it easier to "vote trade", which is probably essential to making legislation pass more easily (the later can be viewed as both a pro or a con, and I take no position on it here).

The other big category I saw in last night's debate that makes me increasingly more supportive of Obama is his aversion of half-truths/lies/irrelevancies where McCain was rife with them. Two that really stuck out to me:

1. McCain accuses Obama of "voting against funding the troops." Obama very nicely responded that Obama was in favor of Cash with a time table (which McCain opposed) and McCain was in favor of cash with no time table (which Obama opposed). The issue was conditions on troop deployment, not cash. Everyone agreed on the cash.

Obama could have just done what McCain did and mischaracterized the issue and said something like "Uh uh. It was you that opposed money for the troops. I supported a bill that would have given the troops the money they needed." This would have led us nowhere - and frankly is what we have mostly been treated to in debates/campaigns of past candidates. Instead, Obama took the time to explain the policy difference and made it clear McCain was misleading everyone.

The second happened a few times and it was McCain accusing Obama of "not really caring" about Afghanistan because he either didn't personally visit it or because he didn't hold sub-committee meetings on it. Obama mostly ignored the "he didn't go there" stuff. In a way I think that is too bad, because it is pretty obvious that the only thing McCain is getting from strolling around war zones is photo-ops. The argument is almost as stupid as Palin's "I'm close to Russia" and I would have liked to have heard it said. But maybe Obama is not the one to say it. I did like his clear and concise answer about the operations of a Senate sub-committee. It is one of Obama's talents that I very much enjoy. He can simplify a complex issue into something understandable by "the masses" with out it just being BS and soundbites.

Overall, the debate gave me more confidence that Obama is the right guy. I hope it had a similar effect on those that are undecided.

I should state one more thing about McCain's "anti-pork" rhetoric. I have to laugh every time I hear "You will know their names!" Isn't that just free advertising? Does McCain actually think the voters of, say, Alaska, are upset that Ted Stevens got a boat load of money for Alaska? If anything, I would expect the result from "Random Guy From State that is Not Alaska" to be - "Hey, Senator X from State that is Not Alaska, Ted Stevens got Alaska $1B dollars in earmarked funds. What is up with you? Where's our pork?"

I would then expect rational voters to return high results for Stevens and maybe vote Senator X out of office in hopes that Senator Y could be more like Stevens.

I'd like to follow up on some of Paul's points. It's always a good talking point for a candidate to talk about cutting spending. It's almost always dangerous to be too specific. Whether it's your local pork or another program, there are always voters who will be lost by criticizing some spending. Unfortunately, politicians like Stevens succeed for the same reasons that the drug lords in Columbia who build schools and churches are liked. Our representative government works so that the good of each state overrides the good of the country, and wasting money is ok if it means pumping the economy in my town. It's often been said that all politics is local, regardless of the disastrous policies.

I don't believe that merely working to get rid of a few corrupt politicians will change this, since it's a systemic problem that reinforces itself. I'm curious if any legal scholars have ideas on systemic changes that might help.

The standard answer to Gary's question is that a line-item veto (for budget items) is a pretty good structural antidote to pork, since the President has a national constituency. The problem, of course, is that the line item veto is unconstitutional, per the case of Clinton v. New York and the text of Article I, Section 7. I don't know of any empirical work on whether states in which the Governor has a line item veto have less pork in their budgets.

At most, a line-item veto would present a minor obstacle, but doesn't change the dynamic. A politician who promises or delivers a road to nowhere for their district wins over someone who is fiscally responsible. Then this person gets to decide national policies. The same goes for those who benefit politically from corruption. The good candidates are at a great disadvantage. Is this the best a democracy can do?

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